Question

On January 1, 2017, Panther, Inc., issued securities with a total fair value of $577,000 for 100 percent of Stark Corporation's outstanding ownership shares. Stark has long supplied inventory to Panther. The companies expect to achieve synergies with production scheduling and product development with this combination.

Although Stark's book value at the acquisition date was $300,000, the fair value of its trademarks was assessed to be $45,000 more than their carrying amounts. Additionally, Stark's patented technology was undervalued in its accounting records by $232,000. The trademarks were considered to have indefinite lives, and the estimated remaining life of the patented technology was eight years.

In 2017, Stark sold Panther inventory costing $75,000 for $125,000. As of December 31, 2017, Panther had resold 74 percent of this inventory. In 2018, Panther bought from Stark $140,000 of inventory that had an original cost of $70,000. At the end of 2018, Panther held $38,000 (transfer price) of inventory acquired from Stark, all from its 2018 purchases.

During 2018, Panther sold Stark a parcel of land for $88,000 and recorded a gain of $16,000 on the sale. Stark still owes Panther $62,000 (current liability) related to the land sale.

At the end of 2018, Panther and Stark prepared the following statements in preparation for consolidation.

	Panther, Inc.				Stark Corporation
Revenues	$	(710,000	)		$	(360,000	)
Cost of goods sold		305,000				189,000
Other operating expenses		167,000				81,000
Gain on sale of land		(16,000	)			0
Equity in Stark's earnings		(39,000	)			0
Net income	$	(293,000	)		$	(90,000	)
Retained earnings 1/1/18	$	(367,000	)		$	(292,000	)
Net income		(293,000	)			(90,000	)
Dividends declared		80,000				25,000
Retained earnings 12/31/18	$	(580,000	)		$	(357,000	)
Cash and receivables	$	102,000			$	154,000
Inventory		311,000				110,000
Investment in Stark		691,000				0
Trademarks		0				58,000
Land, buildings, and equip. (net)		638,000				280,000
Patented technology		0				125,000
Total assets	$	1,742,000			$	727,000
Liabilities	$	(462,000	)		$	(220,000	)
Common stock		(400,000	)			(100,000	)
Additional paid-in capital		(300,000	)			(50,000	)
Retained earnings 12/31/18		(580,000	)			(357,000	)
Total liabilities and equity	$	(1,742,000	)		$	(727,000	)

1. Show how Panther computed its $39,000 equity in Stark's earnings balance.

2. Prepare a 2018 consolidated worksheet for Panther and Stark.

Answer 1

Solution: Tolai fair vaive of $ 577,000 for 100 %. Of Stark Corporation's outstanding ownership shaves - Stark's book valve at the acauisition date was $300,000 a) Excess fair oven book valve : - $ 577,000 - $300,000 .. =) $277.000 b) Amortization Scheduie :: . * The fair vawe of its trade marks was assessed to o be $45,000 more than their carrying amounts. * Stark's patented technology was onde vaived in its accounting records by $232,000. * The estimated remainino life of the potented technology was 8 years... :: Annual amortization is $ 29,000 Hence, useful life in years is NA

c) Elimination of inventory marke op : In 2017, stark hard panthey inventory costing $ 75,000 & $125000 (125000 - 75,000) Cross profit rate. S 125000 - 50.000 125000 0.4 X 100 - 40%. year end inventory at transfer price 125,000 X 267 = 32500 Gross profit deferral for 2017 Recorded a gain of Gross profit) deferral = 16,000 x40 6,2100

Stark $140,000 of In 2018, panthey bought from inventory. Original cost of $70,000. At the end of 2018, panther held $38,000 . 38,000 year end inventory Gross profit yate: 140000 - 70000 140,000 - 0.5 X 100 - 50%. Cross profit de ferrat for 2018 => 38,000 x 50 . => 19.000 d) Elimination of equipment mark op. Down stream: Doring 2018, panther Soid Stark, a parce! of tand for $ 88,000 & recorded gain of $ 16.000. Stil owes panther $ 62,000.

Part A computing of eauity in stare balance Net incom in 2018 $90.000 Less : Annual Amortization $ 29,000 tesso gain Recorded $ 16,000 cess: profit deferral (2018] $ 19,000 Add : profit deferral (2011). $ 6.400 year end bouance of ecority in State's. earnings => 80,000 + 13,000 - 20.000 +6,400 - 29,000 -16.000-19.000 ) 32,400

" Part Bir Panthen company & Consolidation Subsidiary Consolidation worksheet for year ending December 31, 2018 1 Consolidation Entries Panther Stark Debit credit Accounts Revenues Cost of goods sold Totals 430,000 710.000 360,000 TI100.000 189.000 G 19.000 305,000 TI 1340,000 13,000 81.000 248,000 تلا 29.000 Othes operating expenses 167,000 Amortization expense. Gain on Sare of land / 16,000 equity in Stark earnings 39,000 Net income 943,000 E بل 16,000 99,000 293,000 90.000 292.000 (s) 292,000 90.000 25,000 357,000 0 367,000 293, 000 25,000 80,000 580,000 Relained canning Net income 293, 000 86.000 Dividends deciared $80,000 Retained earnings 1/3 Cash & Receivables 102.000 inventory 311.000 691,000 investment in stock 154,000 10.000 62,000 194,000 19,000 H02,000 248,000 34.000 42,000 25,000 A 13,000I $ a . A A 45,000 203,000 Trade marks Patented technology tand, build & net Total assets | 58.000 125,000 638,000 280.000 1,742,000 727,000 F 103.000 24,000 299,000 16,000 402,000 1,900,000

62,000 100,000 50,oo 620,000 100,000 300.000 Liabilities 4462,000 220.000 Common stock 400,000 100.000 S Additional paid incapital 300.000 50,000 S Retained earnings 12/31/18 580,000 357,000 Total liabilities 1,742,000 727,000 580,000 1,900,000